The Takeaway: A Q&A With Matt Swain on Direct, Single-Asset Private Equity Investments

How do directs differ from traditional private equity?

Directs are private equity purchases done outside of blind-pool fund structures, or their associated co-investments, or separately managed accounts. Unlike traditional PE investments, directs don’t tie up your money or charge fees while managers find an appropriate investment. When you commit to a traditional fund, its investments are in the future. Directs focus on a single, identifiable company, offering greater influence, agency, and certainty to investors. The flipside is that directs don’t offer the diversity of a traditional fund or a managed account. Becoming a repeat directs investor, as we recommend, does provide that essential diversity.

What’s the history of directs? 

Prior to 2019, directs existed, but in an undeveloped form. They happened haphazardly, without systematic promotion, and were usually seen as lamentable efforts at building track records by inexperienced managers unable to raise PE funds. By 2019, we had the beginnings of a directs ecosystem, with specialized general partners, limited partners, placement agents, dedicated legal teams, and banking groups burnishing the reputation of directs as a legitimate investment category. Today, directs are recognized as a huge growth opportunity. If the typical return goal in a private equity fund is 2x investment cost and a 15% annual return, in directs, where the focus is on one single asset, the return goal is usually 3x investment cost and a 30% annual return. 

What is the role of Houlihan Lokey in the directs market today?

We raise capital from investors for specific deals, but when we do that, we’re broadening the directs ecosystem. We’re creating long-term relationships between the operationally focused, independent sponsors doing these deals and the growing number of limited partners who want to invest in the deals. It’s a close relationship. We’ve got exclusive five-year capital-raising contracts with a number of the independent sponsors, or GPs. And as a major, global investment bank, we also help find assets, matching promising companies to the right operationally focused independent sponsors. The latter almost always have experience in the company’s sector.

How is volume developing today in directs? 

We’ve seen global volume rise from $6 billion in 2019 to an estimated $50 billion this year, with annual deal numbers tripling over that period. We’ll see over 780 transactions this year, and I believe we’re set for decades of growth. Directs have the promise to account for half of all annual capital raised for private equity in 10–15 years. Major traditional PE fund groups increasingly believe this and are increasingly doing direct deals, especially for promising companies that don’t match the investment criteria of their funds.

Who is investing in directs and why?

An investor base once dominated by family offices is now diverse. Family offices account for 30% of the dollars going into directs today, with public and private pension funds, fund-of-funds, and strategic investors like Amazon accounting for the rest. For investors, putting money to work immediately in assets where the tires can be kicked is appealing. Given that deals are hard to close right now, the record level of uninvested capital sitting in traditional funds on which fees are levied is a major problem for investors. Directs eliminate that issue. 

So, what’s The Takeaway? 

PE funds are just as vital today as they’ve ever been, but directs add real alpha to a sophisticated investors’ portfolio. The future will be funds and directs.

Global Annual Value and Number of Private Equity Direct Deals*